India owes a great deal to the brilliance of Prasanta Chandra Mahalanobis. He established the Indian Statistical Institute, theorised the multi-dimensional generalisation of the idea of measuring how many standard deviations away P is from the mean of D, now popularly known as the Mahalanobis distance. Despite such towering achievements, Mahalanobis is remembered more for executing perhaps one of the most disastrous course corrections taken by a still young nation at the insistence of popular political opinion of the time. Most of the economic issues we are dealing with today remain a legacy of the shift towards centralised planning, which began with India’s Second Five-Year Plan.
Planning is defined by disinterested experts as the technical coordination of consumption, production, investment, trade, and income distribution, in accordance with social objectives set by representatives of the nation. This definition was framed in 1938, well before the Planning Commission came into existence, when the National Planning Committee was set up by Prime Minister Jawaharlal Nehru. His insistence on centralised planning inspired heavily by Harold Laski, remains peculiar, despite vehemently being opposed by both C. Rajagopalachari and BR Ambedkar.
The world had realised that belated industrialisation, in order to succeed, must have State intervention. India, having survived two centuries of colonial rule along with Partition, required a collective effort from both the public and the private sector. By 1955, the Government of India began its preparation for the Second Five-Year Plan. The United States was then led by the erudite Dwight D Eisenhower, a five-star General of the US Army who sent Neil Jacoby and Milton Friedman for assistance with the plan.
The agenda of the Second Five-Year Plan, which was announced by the Planning Commission on May 14, 1956, was to put in place an industrialised State. Nehru was heavily influenced by the industrialisation that had swept the then USSR. But perhaps the Prime Minister had not fully taken into account the experience of Europe, which was rapidly expanding its public sector. Had there been a deeper analysis, the ultimate conclusion would have been that the experience was most disappointing due to the fact that the areas for which the Government can take responsibility for growth and development are so crucial and gigantic and require such a tremendous amount of investment that this would alone be a massive burden on an administrative structure still struggling with its own identity. Nehru’s emphasis on the central role of government was in stark contrast to the already thriving private sector in the country, inherited after Independence. In effect, the Prime Minister insisted on a model which was in principle against the legacy and comparative advantages of the Indian society at large. The nature of centralised planning would inevitably plant the seeds of a strong authoritarian government, Russia and China being major examples.
About 70 per cent of the funds allocated for industrial growth were allotted to large and medium businesses. The heavy industries would be owned by the State. The Plan would be financed with a new tax regime. A number of heavy direct and indirect taxes were introduced with the result that the plan targets of Rs 850 crore of additional taxation were substantially exceeded. The steel plants of Rourkela, Bhilai and Durgapur were established during this period. India’s coal production witnessed a major leap.
The planners and policymakers suggested the need for using a wide variety of instruments like state allocation of investment, licensing and other regulatory controls to steer Indian industrial development on a closed economy basis. This was a monumental mistake. Countless examples exist across the ages to testfy that Indians are entrepreneurial both as innovators as well as imitators. Indians have contributed a significant portion to the entrepreneurial class in every country to which they have migrated and are doing so even today. Indians have contributed to the economic progress of South-east Asia, the Middle East, South Africa and Europe, where they are counted among the richest top 1 per cent in their respective fields. The model of centralised planning in India, which blatantly ignored this key Indian characteristic is responsible today for the often asked question as to why NRIs are so successful abroad compared to Indians at home.
While the plan failed to achieve its major targets, its working led to constantly widening inequalities in the distribution of national wealth. Government policies were distorted to benefit big business. The prices continued to rise alarmingly; the pressure on foreign reserves had been no more than temporarily eased, and given the size of the Third Five-Year Plan, another foreign exchange crisis appeared imminent.
A system was created which was dependent on India’s famed bureaucracy. As a result, the working of the plan also revealed serious organisational weaknesses and deficiencies, both at the policy making as well as the executive levels, in the administrative set-up of the Central and State governments. The regime of the time, ignored even its own revered ideologue, Mahatma Gandhi. He had himself claimed that the idea was not to destroy the capitalist but to destroy capitalism as the West had envisaged. The Gandhian economic order, had it been taken seriously during Nehru’s considerations would have advocated a practical formula which would have provided a means for transforming the prevailing capitalist sentiment into an egalitarian one, where the owning class would be given a chance of reforming itself.
Nehru’s original sin had merely created a very strong tendency for “monuments” symbolising their contribution to nation-building, regardless of their economic consequences. Air India remains a sparkling example today. Thirteen Prime Ministers later, Narendra Modi in 2014 made all the right noises for India’s entrepreneurs with Start- Up India and Make in India. The new government abolished the Planning Commission and established the NITI Aayog. However, the responsibility to supervise this conscious shift was handed over to the very bureaucracy that had created the malaise in the first place.
Five years later, rekindling India’s entrepreneurial legacy remains elusive. The success stories can be credited solely to the entrepreneurs who have succeeded in spite of regulatory hurdles. The direction of NITI Aayog and its relevance, as my good friend and i-PAC economist Bidisha Bhattacharya will tell you, remains a mystery even to its own members. The 2019 campaign trail has articulated similar noises. Political will must transcend platitudes. At any rate, a shift back to centralised planning or re-establishing the Planning Commission would be a disastrous move.
Rahul Gandhi, for one, has never believed that the Congress must remain a hostage of the past. Both his admirers and detractors will agree on this point. This is evident in the everrising curve of expectations both during his elevation as the party president, but more so for his administrative changes in the run-up to the 2019 election. The recently unveiled Congress manifesto shows signs of an evolving ideology.
Courage in politics entails both the ability to speak as well as the ability to listen effectively. Modi’s ability to listen harnessed the silent yet powerful support of India Inc., an opportunity which, to quote Salman Soz’ book, was “squandered”. The party or coalition that forms the majority in 2019 has a renewed opportunity to leapfrog into a new paradigm and bring entrepreneurs truly on board as stakeholders in the growth story.
(The writer is an author and Director of Severus India, a political consulting company)